11/09/2012

A Slowdown At The Tar Sands?

Things are heating up at the tar sands of Alberta. The re-election of Barack Obama is interpreted as a hopeful sign that swift approval of the Keystone XL Pipeline will follow. After all, constructing the pipeline is in Canada's and America's national interest.

Canadian energy companies led by TransCanada Corp. (TRP) and
Suncor Energy Inc. will likely benefit from the re-election of U.S.
President Barack Obama, who analysts say will approve TransCanada’s
Keystone XL pipeline.

More pipelines, including the 1,661-mile
(2,673-kilometer) link from Alberta’s oil sands to refineries on the
U.S. Gulf coast, will be needed as North American oil and natural gas
output is estimated to surge 73 percent in the next 20 years.

Say what? A 73% surge in the next twenty years? Keep reading.

“I
was in Calgary a week or so ago and people are understandably nervous
about Obama and whether he would tack back on this issue after the
election and maybe reward his environmental supporters by not moving the
project forward,” Robert Johnston, director of global energy and
natural resources at the Eurasia Group, said by phone from Washington.
“We still expect it will be approved on the basis of it being in the
national interest.”

Obama rejected Keystone XL in January amid
protests about the oil conduit’s impact on Nebraska’s environmentally
sensitive Sand Hills region. Since then, the pipeline has been rerouted
around the region, while oil output from Alberta to the Bakken formation
in North Dakota has continued to climb.

Production of oil and
natural gas liquids from Canada, the U.S. and Mexico could increase by
more than 11 million barrels per day to 27 million barrels by 2022,
Edward L. Morse, Citigroup Inc.’s global head of commodities research in
New York, said in a report published earlier this year. That would meet
about a quarter of current global consumption.

That additonal 27 million barrels-per-day comes from the feverish, vivid imaginaton of one Edward L. Morse, Citigroup's global head of commodities research. So I ask you, dear reader, to consider the source of this astonishing estimate.

The idea that the Keystone Extra Large Pipeline might become a reality is driving "Wild Bill" McKibben crazy, which is to say that Bill, who has already lost his mental bearings, is being driven further around the bend.

In Seattle on Wednesday night, McKibben kicked off a national campaign Wednesday night at Benaroya
Hall [above] that seeks to demonize the oil and coal industries, and those who
profit from them. "We'll be spreading information about what a rogue industry the fossil-fuel industry has become," McKibben said in an interview. He plans to travel the country in a sustainable-fuel bus, asking
public institutions to divest portfolios of dirty-energy holdings — and
encourage more civil disobedience against those companies. His goal: to
create an environment for more political action on climate. That's "Wild Bill" in the blue shirt, front and center.

But it doesn't matter what "Wild Bill" believes. It doesn't matter what Citigroup's Edward L. Morse believes. Reality is the only thing that counts in this and all other matters. We get the real story from a CBC (Canadian) report by Greg Weston called Oilsands crippled by soaring costs, memo says.

A confidential government memorandum obtained by CBC News warns that
soaring costs of developing the Alberta oilsands could put the brakes on
the massive project, stalling one of the main engines of the Canadian
economy.

The memo written by Mark Corey, one of the highest-ranking officials
in the federal Department of Natural Resources, warns that if the
current trend of spiralling labour and other costs continues, investors
may start to turn off the tap on the massive amounts of money needed to
develop the oilsands.

"Although current crude prices promote oilsands development,
ever-increasing capital and operating costs could make this price
insufficient to support oilsands development at forecast levels," Corey
writes. Cost increases are currently "the biggest risk to investment in the
sector," and could jeopardize the viability of some projects, he says.

The memo estimates that operating and capital costs to extract a
barrel of oil from the tar-like sands have both more than doubled over
the past decade.

It blames a chronic shortage of workers and resulting sky-high labour costs as the main cause of increased operating expenses.

Corey's memo reflects a growing concern inside government over the
future of the oilsands, and specifically the massive amount of capital
investment that will be needed to fuel their continued development.

Natural Resources Minister Joe Oliver recently estimated the oilsands
would need $650 billion in capital investments in the next decade alone
— almost five times what's been spent there over the past 50 years.

The memo written in April this year was obtained under the Access to
Information Act and appears to have been prepared for Natural Resources
Minister Joe Oliver.

If Joe Oliver's estimate is correct, and insofar as he is the pro-growth Natural Resources Minister, we should believe him, then development at the tar sands may stall out regardless of Obama's decision on building the Extra Large Pipeline and Saint Bill McKibben's nation-wide campaign to demonize the oil and coal companies. And if new development at the tar sands wanes, you can obviously forget about Edward L. Morse's 73% increase in North American oil and gas output over the next 20 years. (You could dismiss his silly projection regardless of rising costs at the tar sands.)

The CBC article goes on to describe the increasing interest of the Chinese in financing development of the tar sands. Obviously, those wily, slant-eyed bastards would like the Extra Large Pipeline to run west from Alberta to the Pacific, not South into the American midwest. Even if the pipeline did run south, America could sate its ravenous appetite for oil with "upgraded" syncrude from Canada, freeing up other petroleum resources for the ravenous Chinese to gobble up. And some of that land-locked Canadian sludge will be exported from ports in the Gulf of Mexico.

The most contentious of the two proposed takeovers under review is an
offer by the Chinese state-owned oil giant CNOOC to buy Calgary-based
Nexen for $15.2 billion.

Nexen has been struggling to develop the Long Lake oilsands project
in northern Alberta, where output is only a fraction of what the company
had promised investors.

Nexen owns two-thirds of the Long Lake project, and last year China’s
CNOOC bought the Canadian company that owned the other third of the
enterprise when that firm went bankrupt.

CNOOC is promising to pump new capital into Long Lake, establish a
new headquarters in Calgary, keep all Nexen's staff and management, list
its shares on the Toronto exchange and fund research at a Canadian
university.

Industry analysts say Nexen's future without a takeover is at best uncertain.

But the Canadians are unconfortable with letting the Chinese float oil sands development because it is "one of the main engines driving the Canadian economy." Those opposed to Chinese investment say it is a "security" issue.

What will happen at the tar sands in the next decade? If development costs are steadily rising, and $650 billion will be required over the next 10 years to meet production targets, which is five times the money which has been spent heretofore, then the Extra Large Pipeline may turn out to be one of the biggest boondoggles the North American oil industry has ever experienced. The Wall Street Journal has also figured out there are problems at the tar sands. These quotes are from Mining Canada's Oil Sands: Suddenly, Not a Sure Thing—

The new caution concerning oil sands in Canada comes amid sharply
rising costs for everything from labor to construction material and
contracting. These days, even the most cost-efficient oil sands
producers need U.S. benchmark prices of at least $50 a barrel to justify
investment in new projects, executives and analysts figure. Many of
those projects—with newer technology using steam to coax bitumen to the
surface—are going ahead or forecast to grow quickly.

But for operators who mine bitumen and produce synthetic crude from
it, the break-even threshold can exceed $100 a barrel. U.S. crude is
currently trading well under $90 a barrel.

"The economics are challenging today," said James Burkhard, head of oil-market research for oil consultancy IHS Cera.

The economics are challenging. That's a euphemism meaning the situation is probably FUBAR.

Comments

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I never cease to be amazed at the lunacy of energy speculations by economists and the like. Paul Krugman and his ilk make this whole thing far more complicated than it actually is. Unprofitable energy source 'X', clean or dirty, will never be exploited to any appreciable extent until costs of petroleum increase enough to make 'X' competitive. When the government taxes the oil economy to subsidize energy source 'X', it doesn't make 'X' any more profitable. It just makes the oil economy less profitable. Jobs are not "created" by this charade, so much as the profitable economy funds government redistribution, and the illusion of jobs and growth that can be boasted about for re-election's sake. One can make an argument for subsidy for sustainability/environment benefit, but as long as profitability drives 99% of the equation, we are chasing money down the drain.

The oil sands are a perfect example. They are being developed because of rising oil costs. Rapid development leads to labor shortages and increasing costs of their development. They will stall until more labor enters the market. Oil costs will rise still more; oil sands production will proceed. Nobel prize-winning economists act like this is much more complicated than basic profit maximization and supply and demand. In the end, nobody who matters, least of all Obama or the Chinese government, gives a rat's ass about climate change. It is a growth-driven race to see who can use the remaining fossil fuels the fastest. What we are chasing, though, is vanishingly small profit margins, as the cost of inputs rise. Oil sands being competitive means that industry in general is uncompetitive.

"The memo estimates that operating and capital costs to extract a barrel of oil from the tar-like sands have both more than doubled over the past decade.

It blames a chronic shortage of workers and resulting sky-high labour costs as the main cause of increased operating expenses."

Hmmm. Let's see. In 2002 (probably 2000 data), the US paid $9.85/mbtu (million BTU) for energy. In 2012, the US is paying $18.73/mbtu. Well, look at that. The average price for energy doubled over the last decade. Considering that energy is an input (the ultimate input) to everything we do, could that, rather than labor, be an issue in the rising cost of production? Naahhhhh!

Isn't it interesting how no one checked this stuff out before all the big hullabaloo and all the self serving and televised arrests prior to the election? And Obama's so called "soul searching" before allowing part of the pipeline to be built.